China's New Concepts of Intelectual Property

China's New Concepts of Intelectual Property The Chinese business environment has reached a level of attractiveness that hasn't been seen for few decades. Why? They master in the art of providing amazingly cheap products, in all industries. We all know that this is possible because of their low wage labor force, but we often forget one other reason. China has often been the source of complaints concerning the theft of Intellectual Property (IP), especially coming from the United States.

In some industries IP theft seemed to be a crucial part of China's comprehensive low-cost advantage, more significant even than cheap labor. The true harm comes from Chinese companies acquiring world-class technology at little or no cost and then, once enriched, leveraging considerable competitive positions, to the discontentment of the IP's originator (who took several years and spend few millions of dollars to manage such a breakthrough). China's telecommunications giant, for example, Huawei Technologies, grew into a multibillion-dollar competitor by "borrowing" the technology of advanced rivals, which had only their eyes to cry. Huawei seems to have never admitted anything, but when reaching a certain size it began settling with those same rivals (Cisco Systems) to enter new markets! American telecommunication firms now compete with Huawei all over the world.

This phenomenon also metamorphoses in a trade barrier. Why do many companies avoid the Chinese market? Because of the fear of losing their most valuable assets: their intellectual property. That fear prevents American businesses from immersing themselves into the world's fastest growing economy with valuable products they would otherwise be enthusiastic about selling.

One new mechanism, that dissuades many of joining the Chinese miracle business center, is the so-called CCC safety certification. Every electronic component or piece of equipment to be sold in China must be submitted to the Chinese government body overseeing the CCC certification. The process requires the foreign manufacturer to give Chinese officials full access to engineering drawings and schematics and to provide a complete finished product for evaluation. In addition, the applicant companies must pay for Chinese officials to visit and inspect their factories outside of China.

"This is a function of China's no-cost technology environment," William J. Jones and chairman of Cummins-Allison said. "At every stage of the supply chain you have companies that do not have the technology costs American firms have. Chinese companies run counterfeit software, reverse-engineered machines, and other proprietary processes they need not pay for. So by the time a Chinese company assembles a product from Chinese parts, there is a big savings that has accrued all along the way. We have to pay for parts that are made in places that pay a lot for their technology, so naturally we pay more."

What would improve if the amount of IP theft in China began to diminish? First, IP protection would chip away at China's low-cost manufacturing advantage. Second, it would create a large market for America's high-value technology and entertainment products, leading to new business perspectives for many.

Since many global protests have come out, the Chinese government had to act to satisfy Western issued complaints.

Announcements of stepped-up enforcement against pirates and counterfeiters were made. So yes, China will probably launch very public campaigns against knockoff polo shirts and handbags. But there is no sign that its more sophisticated policies designed to facilitate technology transfer, such as the CCC regulations, are up for change. China has had access to "material" property for less than thirty years, so one can easily understand to what extent Chinese people and authorities consider Intellectual property.

China's extremely loose intellectual property regime has been a key element in the country's development. From the perspective of Chinese leadership looking to increase the wealth, health, happiness, and global competitiveness of 1.3 billion people, "borrowing" intellectual property looks like a nice fast track out of the Third World.

About the Author:

Tim Lyons is Executive Director of Manage China. Manage China is a company that helps foreign firms who are interested in doing business in China. www.managechina.com

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